To understand what we mean by the “surplus approach to value and distribution” let us begin by contextualizing the importance of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations. Smith sought to provide an explanation for why countries grow rich with abundance by focusing on the institutional factors that make things productive in the workshop. This was not just idle curiosity – rather Smith was challenging the orthodoxy of his day, which held the idea that the country grows rich through plunder and trade. Recall, Wealth was published in 1776, which lies at the end of a period of economic society organized by late feudal institutions and a bent toward colonial expansion. Smith’s task was to formalize a new method of economic analysis fit for an ascendant merchant and capitalist class, wherein the source of wealth would be identified in the production process itself.

What Smith develops in Wealth is a framework for linking together successive stages of development, from, say, raising livestock for wool to the production of woolen fabrics, and all the way through to the final production of a wool coat. The emphasis here is on the interdependence of these activities and how the division of labor across markets, or even within a single workshop, come together to produce more value than existed prior to production. This sets the stage for an elaboration by David Ricardo, who gives us the Corn Model concept we encounter in the following section, which Karl Marx revisits in Capital. This body of thought, from Smith through Marx – and picked up again in the 20th century by Pierro Sraffa and others – is known as the Surplus Approach to Value and Distribution.

The Surplus Approach is defined by its emphasis on two aspects of an economic system:

1. The quantity and quality of the surplus product of an economic system
2. The structure of interrelationships of the economic system

The first consideration leads directly into questions like, “How much net product (surplus) does the economy produce in a given period?” and “What makes up the surplus product?” But, notice, there is a lurking implication that whether or not the economy is capable of producing any surplus is an open question. And doesn’t thinking in terms of surplus product imply that some goods are used up along the way to make the whole machine go on?

Now we get into the second consideration, which asks us to think specifically about the structure of interrelationships between the different parts of the economy. Firms operating in markets in one area of the economy rely upon the output of firms operating in markets in other areas. If you think about this long enough, you may get a sense that the economy is less abstract than presented by the circular flow diagram above, and really becomes just a vast and intricate web of inter-industrial product flows. It’s a network and it takes the whole network to make the engine run! If there are critical industries that fail to produce the necessary outputs that other industries rely upon, then, well, we may no longer have a viable economy.

So, we may now define viability as the property of the structure of the economy that makes possible reproduction of subsequent rounds of production. An economy that is viable is capable of simple reproduction—i.e., producing the necessary inputs in the system to do it all over again. But, in general, viable economies also produce a surplus. This concept of viability is closely related to the concept of the Going Economy as we presented in the previous section. The difference lies in emphasis: The Going Economy model arises from institutional analysis of the corporation as a center power in a coordinated and engineered economy, whereas the notion of viability and reproduction is an analytical tool of classical political economy. It’s very useful to consider these analytical traditions together to understand the modern economy. Let’s explore these insights further through the use of the Corn Model in the following sections.

Glossary

viability

the property of the structure of the economy that makes possible reproduction of subsequent rounds of production